Featured Research

from universities, journals, and other organizations

'Big Five' Oil Companies Limit Exploration

Date:

November 13, 2007

Source:

Rice University

Summary:

The "Big Five" international oil companies are spending less money on oil exploration in real terms despite a four-fold increase in operating cash flow since the early 1990s. On the flip side, the study, "The International Oil Companies," finds that second-tier oil companies are spending more in exploration, positioning themselves to be in better shape when it comes to future oil reserves.

Share This

A study released by Rice University's Baker Institute for Public Policy finds that the "Big Five" international oil companies (IOCs) are spending less money on oil exploration in real terms despite a four-fold increase in operating cash flow since the early 1990s. On the flip side, the study, "The International Oil Companies," finds that second-tier oil companies are spending more in exploration, positioning themselves to be in better shape when it comes to future oil reserves.

Related Articles

The analysis is based on Baker Institute research on investment expenditures by the IOCs, the next 20 largest U.S.-based oil firms and national oil companies (NOCs). Data were culled from U.S. Securities and Exchange Commission filings going back to 1995 and, in the case of NOCs, to news reports and other public data.

The study found that the Big Five (ExxonMobil, Royal Dutch Shell, BP, Chevron and ConocoPhillips), used 56 percent of their increasing cash flow on share repurchases and dividends, which were good for investors in the short term but put at risk the companies long-term oil reserves.

"The handwriting is on the wall. The oil majors are not replacing reserves," said Amy Myers Jaffe, co-author of the report and the Wallace S. Wilson fellow for Energy Studies at the Baker Institute. "It's as if they are slowly liquidating their long-term asset base. They may see a declining rate of production over time and eventually that is bad news for both their shareholders and consumers."

State-owned monopolies, known as national oil companies (NOC), represent the top 10 oil reserve holders internationally. By comparison, ExxonMobil, BP, Chevron and Royal Dutch Shell are ranked 14th, 17th, 19th and 25th, respectively.

The IOCs still rank among the largest oil and gas producers worldwide, and these Western majors have also achieved a dramatically higher return on capital than national oil companies of similar size.

"The Five Big IOCs are still an important force in the market. Their production represents over 20 percent of non-OPEC production," notes Jaffe. "But, investors are placing a higher premium for the stock shares of emerging national oil companies, despite the measurable edge the majors have in terms of operational efficiency. Clearly, they are betting on who will own the oil in the future. Last week's announcement that Brazil's state oil company had an 8-billion-barrel discovery is a case in point."

Study findings summary:

Exploration spending of the five largest IOCs has been flat or lower in the aftermath of OPEC's reinvigorated effort to constrain market supply in 1998. Given the uptick in costs of material, personnel and equipment such as drilling rigs, the five largest IOCs have cut spending levels in real terms over the past 10 years. This trend appears, however, to be easing, with exploration spending by the five increasing IOCs rising by 50 percent in 2006 over 2005.

Instead of favoring exploration, the five largest IOCs used 56 percent of their increased operating cash flow in 2006 on share repurchases and dividends. They have also increased spending on developed resources, presumably to monetize these assets quickly while oil prices are high.

The next 20 largest privately traded U.S. oil firms have not followed a similar pattern. Instead, they have steadily increased exploration spending since 1998 and their spending now equals that of the five largest IOCs. This differing pattern comes despite the fact that the five largest IOCs have access to operating cash flow that is three times the size of the next 20 largely traded American oil firms. This trend indicates that these 20 next-largest privately traded American firms will control an increasing portion of non-OPEC oil production in the coming years.

Oil production of the five largest oil companies has declined since the mid-1990s. Oil production for the five largest IOCs fell from 10.25 million barrels a day (b/d) in 1996 to 9.45 million b/d in 2005 before rebounding to 9.7 million d/b in 2006. By contrast, for the next 20 U.S. independent oil firms, their oil production has risen since 1996, from 1.55 million b/d in 1996 to about 2.13 million b/d in 2005 and 2006.

Since 1994, the nine NOCs who actively participate in international exploration invested more than $66 billion abroad in upstream, or exporation and development, activities. Chinese firms alone announced foreign projects worth $9 billion in 2006, most of which was in the form of access to oil fields in Russia, Nigeria and Kazakhstan -- comparable to the total amount spent by the Big Five on exploration that year but still small compared to the $59.4 billion they spent on exploration and development combined.

Wall Street investors increasingly recognize these new exploration investment trends and the value of shares of NOCs have risen at a much faster rate than those of the largest IOCs.

Parallel restraints on exploration spending by the Big Five and major OPEC producers could lead to less competitive global oil markets in the next decade.

The wave of consolidations in the 1990s of the largest publicly traded oil firms has not led to related success in completion of large, complex oil projects and reduction in costs for those projects. Several of the world's largest oil companies merged in 1998, arguing for the need to cut costs, enhance efficiency and grow capital strength to tackle the massive spending requirements for multi-billion dollar mega-projects in places like Russia, Venezuela and Saudi Arabia. However, spending patterns of these companies since the mergers failed to show any appreciable increase in exploration spending from the previous levels of their pre-merger entities. One explanation for this trend is that companies may now be constrained by significant political changes in major oil producing countries such as Russia and Venezuela.

Given the superior record of the next 20-largest publicly traded American oil firms for reserve replacement and exploration activity, there appears to be a level of consolidation that suggests that firms can become too large to effectively exploit the kinds of reserves currently available for private capital.

More From ScienceDaily

More Earth & Climate News

Featured Research

Mar. 3, 2015 — Attendance at schools exposed to high levels of traffic-related air pollution is linked to slower cognitive development among 7- to 10-year-old children in Barcelona, according to a new ... full story

Mar. 3, 2015 — While studying a ground-nesting bird population near El Reno, Okla., a research team found that stress during a severe weather outbreak of May 31, 2013, had manifested itself into malformations in ... full story

Mar. 3, 2015 — Researchers studied quartz from the San Andreas Fault at the microscopic scale, the scale at which earthquake-triggering stresses originate. The results could one day lead to a better understanding ... full story

Mar. 3, 2015 — The 3-D printing scene, a growing favorite of do-it-yourselfers, has spread to the study of plasma physics. With a series of experiments, researchers have found that 3-D printers can be an important ... full story

Mar. 3, 2015 — Researchers have developed a new way of rapidly screening yeasts that could help produce more sustainable biofuels. The new technique could also be a boon in the search for new ways of deriving ... full story

Mar. 3, 2015 — For almost a century, scientists have been puzzled by a process that is crucial to much of the life in Earth's oceans: Why does calcium carbonate, the tough material of seashells and corals, ... full story

Mar. 3, 2015 — Major cities in the UK are falling behind their international counterparts in terms of their use of smart technologies, according to a new study. The research has found that smart cities in the UK, ... full story

Mar. 3, 2015 — To simulate chimp behavior, scientists created a computer model based on equations normally used to describe the movement of atoms and molecules in a confined space. An interdisciplinary research ... full story

Mar. 3, 2015 — Rather than just waiting patiently for any pollinator that comes their way to start the next generation of seeds, some plants appear to recognize the best suitors and 'turn on' to increase the chance ... full story

Featured Videos

Looted and Leaking, South Sudan's Oil Wells Pose Health Risk

AFP (Mar. 3, 2015) — Thick black puddles and a looted, leaking ruin are all that remain of the Thar Jath oil treatment facility, once a crucial part of South Sudan&apos;s mainstay industry. Duration: 01:13
Video provided by AFP

Related Stories

July 10, 2014 — The vegetable oil found in your popcorn or soap might not be ape friendly, and the situation appears likely to get even worse, according to an analysis. The growing demand for vegetable oil has ... full story

Oct. 3, 2012 — Scientists are describing what may be a "complete solution" to cleaning up oil spills -- a super-absorbent material that sops up 40 times its own weight in oil and then can be shipped to an ... full story

Oct. 7, 2010 — The ups and downs of the bacteria in an oil field provide a useful source of information for keeping tabs on the state of the oil field itself. In theory, this process known as ... full story

Mar. 10, 2010 — In a finding that may speed efforts to conserve oil and intensify the search for alternative fuel sources, scientists in Kuwait predict that world conventional crude oil production will peak in 2014 ... full story

ScienceDaily features breaking news and videos about the latest discoveries in health, technology, the environment, and more -- from major news services and leading universities, scientific journals, and research organizations.